Bear with me. The title might be misleading. I’m trying to make DS1 forms sound exciting. They’re not. They are, however, essential if you’re releasing security in full at the Land Registry (for partial releases you need a DS3).
They are fairly straightforward forms that get executed and delivered regularly as part of day-to-day life for anyone involved in real estate finance transactions or other types of finance transaction that happen to include a mortgage over some real estate.
So why has this article been written? Well, it’s come to the writer’s attention that over the past year or so there have been more cases than one might expect where this seemingly simple piece of paperwork has resulted in a headache for lawyers and lenders. Are people getting too complacent with their DS1s, is the Land Registry getting stricter or is it just a co-incidence? Probably the latter but we thought you might like to hear about some of these problems people have faced so you can be sure to avoid them yourself.
What’s gone wrong?
1. Forged signature
It is important to check that a DS1 has been genuinely executed by the outgoing lender. In a recent case, the borrowers provided their solicitor with a fraudulently signed DS1 telling them that this was signed by the outgoing lender. The DS1 was submitted by the borrower’s lawyers. When the Land Registry asked for confirmation that the signatory had authority to sign on behalf of the outgoing lender, the borrower provided a fraudulent power of attorney which was also passed on to the Land Registry.
Two years later, the outgoing lender discovered that its charge had been removed and applied to reinstate it. The charge was reinstated but ranked behind a new lender’s charge that had been registered in the interim. The outgoing lender obtained an indemnity against the Land Registry who in turn pursued a course of action against the solicitors (and succeeded on a negligent misrepresentation claim). The point to note here when discharging existing security – it is very important to check and ensure that authority is obtained to release the security especially when a lender discharged existing security is not legally represented. Make sure the documents are genuine if you are not directly in touch with the outgoing lender or its lawyers.
2. Lawyers making off with the money
This next case involved a re-mortgage where the borrower’s solicitor had given an undertaking to the incoming lender’s solicitors to use completion monies to redeem existing mortgages and to deliver the forms DS1 signed by the outgoing lender to the new lender’s solicitor.
The borrower’s solicitors then “misappropriated” the loan money instead of using it to pay the outgoing lender and did not fulfil their undertaking to deliver the DS1s. The incoming lender was left in the position of having released completion monies but not having security, with the old security still being in place. The re-mortgage was held to not have occurred.
The case made clear that a re-mortgage transaction doesn’t complete until the redemption of the existing security so the borrower was not contractually liable to repay the incoming lender (who was only partially compensated by the Law Society Compensation Fund). This highlights the importance of ensuring completion monies are held by a trusted solicitor and not released until there is a robust arrangement in place for the release of prior security.
3. E-DS1 filed in error
In this case, the lender filed an online e-DS1 releasing security following repayment of a loan. What they did not realise was that the “all monies” charge secured more than one loan and not all outstanding debt was being repaid. In this case, as the borrower’s solicitors contributed to the misunderstanding, it was agreed that the register could be rectified to reinstate the lender’s charge. This is not however a situation any lender would like to be in. Before any release of security it’s important to be certain that there is no other outstanding debt secured by the charge and to bear in mind that this could be debt by way of borrowing or by way of guarantees of another person’s debt.
But remember, DS1 disasters are rare so please, don’t have nightmares….